October 1, Nepal’s banking sector is caught in an uncomfortable paradox. Interest rates on loans have fallen to some of their lowest levels in years, deposits are piling up faster than banks know what to do with them, and yet businesses across the country remain reluctant to borrow. The result: ample funds sitting idle in the financial system, doing nothing for an economy that badly needs investment.

The Numbers Don’t Add Up

On paper, credit should be booming. Average lending rates have dropped to roughly 5 to 6 percent, significantly down from close to 10 percent just couple of years ago. Deposit rates have fallen in tandem, to around 2 to 3 percent. Cheaper borrowing is supposed to be a green light for businesses to expand, invest, and hire.

Instead, private-sector credit growth has crawled along at just 6–7 percent annually, while deposits have surged by 14–15 percent over the same period. Banks now hold a credit-to-deposit ratio of only around 70 to 75 percent — well short of the 90 percent ceiling regulators allow. Bankers’ are  blunt about the mismatch: banks are willing to lend, but few are willing to borrow.

A Widening Trust Deficit

Beneath the statistics lies something harder to quantify: a breakdown in mutual confidence between banks and the people they’re supposed to be lending to.

On one side, banks have grown wary of extending credit on anything but the safest terms. Nearly two-thirds of all lending — 63 to 65 percent — is still secured against real estate rather than a business’s cash flow or growth potential. It’s a sign that banks trust land more than they trust borrowers’ ability to repay from earnings. That caution has its costs: non-performing loans have crept up to over 5 percent, and the value of collateral banks have had to seize from defaulters has ballooned significantly — property banks now own but can’t easily sell in a sluggish real estate market.

Making matters more fraught, aggressive use of the Credit Information Bureau’s blacklist has long been a sore point for small and medium enterprises, which employ roughly 70 percent of Nepal’s workforce. Industry groups have repeatedly accused banks of moving too quickly to blacklist struggling businesses rather than working with them — a practice that has left many entrepreneurs distrustful of getting too deep into debt in the first place.

On the other side, businesses themselves are pulling back — not because credit is expensive, but because they don’t trust the returns. Industry insiders say entrepreneurs are now prioritizing “capital safety” over access to cheap loans, a marked shift after a stretch of political and economic instability shook confidence in the domestic investment climate. Many would rather sit on cash than risk it in an economy where investment returns feel uncertain or they are investing in the economy which seems far less risker compare to Nepal.

A Growth Problem Money Can’t Solve

The consequences are becoming clear. Nepal’s GDP growth is projected at a modest 4.3 percent for 2026, sluggish for an economy with youth unemployment approximately more than 20 percent and a heavy reliance on remittance inflows to keep the financial system liquid. Rather than fueling factories, infrastructure, or new enterprises, much of the country’s capital is instead being parked in central bank instruments — safe, but economically inert.

Analysts increasingly argue that this is no longer a liquidity problem that lower interest rates can fix. It is, at its core, a confidence problem. Cutting rates further does little if banks won’t lend beyond the safety of collateral and borrowers won’t take on debt they don’t trust will pay off.

Fixing it, most agree, will require more than monetary policy: stronger cash-flow-based lending practices, fairer and faster loan-recovery and dispute mechanisms, and — above all — a more stable political and economic environment that gives both sides a reason to trust each other again.

Until that trust is rebuilt, Nepal risks a strange kind of stagnation: an economy with plenty of money, and nowhere for it to go.

The trust gap between banks and borrowers isn’t just a financial-sector problem — it carries consequences that ripple across the entire economy. Small and medium enterprises are likely to suffer most, since credit flowing mainly toward those with real estate collateral leaves small entrepreneurs with strong business ideas but limited property excluded from financing, squeezing the very sector that employs 70 percent of the workforce and stalling new job creation. This, in turn, deepens the economy’s dependence on remittances from overseas workers, as stalled domestic investment leaves productive sectors like industry, agriculture, and exports underdeveloped, trapping Nepal further in a consumption-driven, production-starved pattern. Without growing domestic investment or new job creation, educated and skilled youth are left with little choice but to seek opportunities abroad, risking a steady drain of the country’s human capital over time.

The banking sector itself is not spared either. As non-performing loans rise and unsold seized collateral piles up, banks’ profitability and capital strength erode, pushing them toward even more conservative lending — leaning further into collateral-based credit and taking on less risk — which only deepens the underlying cycle of mistrust. Meanwhile, even with cheap credit available, the lack of investment in setting up or expanding industries means Nepal misses the chance to build its own production capacity and reduce import dependence, perpetuating the country’s persistent trade deficit. As investors seek safety over returns, capital piles up in bank deposits or government securities instead of flowing into productive investment, keeping both the stock market and real estate sector sluggish for an extended period. Slower economic activity also means weaker collection of customs duties, income tax, and other revenue, which could push the government toward greater reliance on foreign loans or grants to fund development spending and infrastructure. And if this situation persists, foreign investors may increasingly view Nepal as a market with abundant liquidity but weak institutional trust — a perception that could further hinder efforts to attract foreign direct investment, compounding nearly every other strain the trust deficit already places on the economy.